Arrow’s technology will enable the next generation of derivatives markets by delivering decentralized options creation and settlement to Avalanche. A key advantage of building asset creation and settlement capabilities on blockchains is that users of the transaction application comprise the transaction infrastructure, greatly reducing barriers to innovation and access. On blockchains like Ethereum and Avalanche, balances of financial assets are associated with an address, and transfer approvals are under the control of the user, who has a cryptographic key associated with their address. Often, secure wallet applications interact with financial applications to automate this approval process.
Avalanche is the natural base layer for Arrow because of high throughput, near-instant finality, near-zero transaction fees, and front-runner resistance, all of which are enabled by its unique random-sampling consensus algorithm. Avalanche’s average transaction costs are lower than Ethereum despite running the Ethereum virtual machine (EVM) on its C-chain and is home to a rapidly growing Defi ecosystem.
While Arrow’s option contracts and settlement mechanism are deployed on Avalanche's C-Chain network, a subset of the calculations the protocol makes are handled by specialized nodes. For price oracles, we use Chainlink price feeds, which can be set up for any price reference with a public API. For our pricing and hedging calculations, we use our own custom oracles that run reproducible computations using the pool data and the monetary risk measure. Our oracles are called to generate indifference prices and updated hedging requirements for new contracts.
Future versions of the Arrow protocol will be extended to incorporate streamlined virtual machines (VMs) like the Avalanche X- chain and custom VMs that target oracalization of the underlying assets' data. The protocol can also be implemented in private networks.